| Once upon a timeOnce upon a time, many years ago | | | | program.- Minimum volume level on items. The |
| there was a young, ambitious salesman selling flat | | | | consignment program involves a level of overhead |
| rolled steel. This energetic young man called on one | | | | that may not be supportable on low turnover items.- |
| potentially large account for months and months with | | | | Integrity of customer. No matter how thorough your |
| zero success. He was going nowhere fast. The only | | | | consignment agreement, all such programs involve a |
| thing he got from the rather large, burly looking | | | | high level of trust between parties. How easy are they |
| professional purchasing agent was frustration. The | | | | to do business with?It is very important, then, to |
| purchasing agent knew the young salesman was short | | | | complete a diagnostic review. The diagnostic review, |
| on experience. The young salesman felt that the | | | | initiated by your sales support team, is the first step in |
| purchasing agent actually enjoyed watching him squirm | | | | preparing for consignment. The review involves your |
| month after month. This young salesman, being | | | | entire organization and represents a complete and |
| enthusiastic and energetic, tried every sales technique | | | | thorough assessment of the customer's current |
| he had ever learned. Of course, the scruffy old | | | | operating environment. It provides the base of |
| purchasing agent was familiar with every one of them | | | | reference for all future consignment activities. It is |
| and had seen them many times before. Nothing | | | | primarily a data collection and operational analysis |
| seemed to work on this guy. The young man just | | | | effort which defines the consignment opportunities and |
| couldn't reach him. So, he went back to something | | | | the challenges that must be met for implementation. It |
| very basic that most of us in sales (especially we | | | | includes an assessment of:- Operations- Material Flow- |
| Baby Boomers) learned from day one. The young | | | | Material Storage- Organization- Market |
| salesman reflected on the words spoken by his most | | | | RequirementsThe diagnostic review results in a |
| cherished mentor, "Build a relationship son. Get the man | | | | thorough understanding of the barriers, constraints and |
| to like you and he'll tell you how to do business with | | | | opportunities to implementing the consignment |
| him."ExpectationsWell, the young man tried and tried, | | | | partnership. It provides the baseline for assessing |
| but even that didn't seem to work. He was ready to | | | | improvement opportunities and for developing the |
| give up. He was tired of repeatedly hearing that same | | | | consignment strategy. Failure to perform the diagnostic |
| pathetic purchasing agent's theme song, "I'm happy | | | | review significantly reduces the probability of success |
| with my current suppliers."The young salesman was | | | | for consignment implementation. This can often negate |
| not smart enough, did not have enough scar tissue and | | | | any cost savings generated by the concept itself.Once |
| was not confident enough to reply, "Maybe that's | | | | an account is determined eligible and the diagnostic |
| because you have set your expectations way too | | | | review has been completed, further development of |
| low." Instead he resorted to his secret weapon, his | | | | the rules of engagement include:- Minimum turn rate- |
| rarely used prideful technique that only came out when | | | | Number of items to be consigned- Stocking location- |
| all else failed - He begged. "Mr. Customer, is there | | | | Who will do the count- How damaged goods will be |
| anything I can do, anything at all that will convince you | | | | handled- What the replenishment cycle will be- What |
| to give me a chance to do business with you?"Have | | | | the billing procedure will be- What the billing cycle will |
| you ever been in the midst of a sales presentation and | | | | beOther criteria that is specific to the customer in |
| feel a knockout punch land on your chin? Well, that's | | | | question should be added to this list.JIT on |
| how the reply felt to the young salesman. "Look, we | | | | SteroidsConsignment partnerships act like Just-in-Time |
| have a partnership with our current supplier. The only | | | | programs on steroids. They provide all the benefits of |
| way you could ever do business with me is if you | | | | Just-in-Time without the high transaction cost, |
| gave me our steel for free," the purchasing agent | | | | purchasing management stress and risk of stock |
| barked. | | | | outs.It is extremely important to get as much specific |
| The young salesman was devastated; He saw the | | | | information as possible directly from the customer. |
| thrill of victory vanish before his eyes, as he tasted the | | | | When you do your "cost savings analysis" and your |
| agony of final defeat. He walked away from that call | | | | "price is not the same as cost demonstration," you will |
| with his tail between his legs. | | | | face less of a challenge if the bulk of your information |
| The young salesman was down and depressed. He | | | | comes from the customer, thereby increasing their |
| was in one of those typical valleys anybody who is or | | | | perceived accuracy of your assumptions.The following |
| has ever been in sales recognizes. The best way to | | | | information is critical to the success of your sales |
| pull ourselves out is to make a buddy call - a call on | | | | presentation. Your objective is to get as much |
| one of our best customers, based not on revenue but | | | | accurate information as possible from the customer. |
| on friendship; one of those frequent calls we make | | | | That information should include:- Average volume of |
| and get criticized for making because the sales | | | | purchases on items being considered for consignment- |
| volume doesn't justify the number of times we visit."He | | | | Average inventory of purchases on items being |
| was a friend," the young salesman thought. So he told | | | | considered for consignment- Average number of turns |
| him the story. His friend and customer was | | | | on items being considered for consignment- Average |
| sympathetic, understanding and even though he didn't | | | | cost per transaction (Customer generally doesn't know |
| offer any advice, the young salesman recaptured his | | | | the answer to this one, but use whatever number he |
| spirit. That night as he sat on his front porch reflecting | | | | guesses. Industries average between $30 per |
| on the day, he thought, "Why not? Why not give him | | | | transaction to as high as $85 per transaction.)- Annual |
| our product for free?" Full of excitement, the next | | | | average inventory write-offs- Cost of cycle counting- |
| morning he went directly to his boss, the owner of the | | | | Cost of annual physical inventory including |
| small privately held company. He convinced the owner | | | | reconciliation- Number of stock outs per year and cost |
| of the integrity of his new plan.A concept was | | | | of a stock out |
| bornThe concept of consignment in steel distribution | | | | If your customer can't answer these questions, try to |
| was born. That happened in the mid 1980's. | | | | help them come up with their best guesstimate before |
| Consignment was already being used in the fastener | | | | you resort to using industry estimates. The idea is that |
| industry but I do not recall anybody in the steel | | | | it is difficult for the customer to challenge a number |
| distribution industry using it. But, as we, the young | | | | that they created.Consignment BenefitsConsignment |
| salesman and me, his boss, found out, the concept of | | | | benefits, pure and simple, equate to cost reductions. |
| consignment can work in any industry. It was a tough | | | | These cost reductions include: |
| sell, not so much to the customer, but to me as his | | | | - Reduction or redeployment of personnel- Reduction |
| boss. But, we did it and it was successful. The | | | | of transaction costs- Reduction of handling costs- |
| prospect this young salesman almost walked away | | | | Reduction of insurance costs- Reduction of inventory |
| from became our largest account, purchasing over $4 | | | | taxes- Vendor consolidations- Reduction of interest |
| million by the end of the second year. It became a | | | | costs- Elimination of opportunity costs- Elimination of |
| learning experience for both of us and we both | | | | stockoutsA primary objective of consignment is to |
| profited from it. And the large burly looking purchasing | | | | reduce the customer's cost of carrying inventory. This |
| agent actually did become one of the young | | | | includes the cost of money, shrinkage, taxes, handling |
| salesman's closest friends.Consignment can become a | | | | and storage. Typically, these handling costs range from |
| very effective marketing tool if it is used correctly. The | | | | 18-30% of the average inventory value.Additional |
| emphasis is on using it correctly. A consignment | | | | benefits to the customer include:- Flexibilityo Material is |
| partnership should not be considered without | | | | always in stock at no cost until the material is released |
| establishing specific criteria for selecting appropriate | | | | for production. Quantities available can be altered to |
| accounts up front. This is extremely important to you, | | | | meet peak demands as well as downturns.- Reduction |
| the supplier. We call this selection criteria the "Rules of | | | | of dollar investment in inventoryo Consignment |
| Engagement."In contrast to the normal Rules of | | | | partnership provides an alternate use of capital and |
| Engagement in selling, consignment Rules of | | | | customers will not be invoiced for material until |
| Engagement are predetermined by the supplier, not the | | | | released for production. It also provides emergency |
| customer. Of course, the rules can be modified with | | | | safety stock for production with no inventory |
| proper approval to fit different situations. However, a | | | | investment cost.- Shorter lead timeso Normal lead |
| consignment partnership must be a win-win relationship | | | | times would be approximately 1-2 days, however, the |
| in order to be successful.Rules of EngagementThe | | | | consignment partnership eliminates lead time as |
| specific criteria that need to be determined before a | | | | material is always in stock and available at the |
| consignment partnership is offered include:- What is | | | | customer's plant.- Assures growth opportunityo |
| the minimum annual sales volume you are willing to | | | | Consignment partnerships provide the availability of |
| accept?- What are the minimum annual gross margin | | | | consistent quality. Quantities and pricing are not subject |
| dollars you are willing to accept?- Are financial | | | | to restrictions based on changing market conditions. |
| statements available for your review?- Is the customer | | | | Consignment partnerships enable us to effectively |
| financially secure?- How much risk/investment are you | | | | manage the supply chain, thus ensuring the lowest total |
| willing to accept in off-site customer | | | | cost.- Pricingo Pricing will be consistent regardless of |
| inventory?Answers to these preliminary questions | | | | quantity used. (No Extras) The price for one item is the |
| need to be established in addition to others that may | | | | same as the price for 100 items.- Vendor reductiono |
| pertain to your product and industry.An Assessment of | | | | Reducing the number of vendors, consolidating sizes, |
| the Consignment PartnershipEven today in many | | | | parts, communication and administration can contribute |
| industries, consignment is on the leading edge of | | | | to overall cost reductions - substantial reduction in |
| custom designed cost reduction programs. Initiatives | | | | debits and credits.- Generalo The intent of this |
| focus on total cost, not price, in order to move to the | | | | program is designed to offer overall cost reductions, |
| next level of partnering, surpassing expensive JIT | | | | flexibility in scheduling, improved cash flow, reduction in |
| programs that have high administrative costs and | | | | inventory and investment, assured growth opportunities |
| service risks. | | | | and to enhance long-term vendor relationships.This |
| The major objective of a consignment partnership is | | | | results in the true meaning of partnership, a win-win |
| to reduce costs by eliminating inventory and duplicate | | | | relationship. A customer may ask the question, "How |
| effort, as well as reducing shrinkage and lowering | | | | can you provide all these services without charging a |
| transaction and handling costs. It is also effective in | | | | substantial premium on pricing?" The answer is simple. |
| reducing scrap, rework, equipment downtime, lead-time | | | | Consignment is a partnership that provides benefits to |
| and over production.As consignment becomes | | | | both parties. Your benefits as a supplier include:- |
| recognized in the marketplace as the "way of the | | | | Locking out competition- Better control of inventory- |
| future," caution should be exercised due to the lack of | | | | No warehouse space required for growth- Regularly |
| experience and misconceptions by the | | | | involved at customer location- First chance at new |
| competition.Misconceptions include:1: Consignment is a | | | | opportunities- Hard to cancel - hard to duplicate- |
| Supplier Program | | | | Customer becomes supplier dependent- Free storage |
| Consignment does not start with a company/supplier | | | | space at the customer's facility |
| seminar where you ask the customer how much he | | | | Happy Ending?We started this article in storybook |
| wants to stock on his floor. Consignment is complex, | | | | fashion. Consignment may sound like the "Knight in |
| requiring supplier professional expertise, state of the art | | | | Shining Armor," the "Magic Bullet," or the answer to |
| technological MIS and a true commitment of a joint | | | | cracking your toughest challenge. Be cautious. Not |
| partnership throughout both organizations.2: | | | | every story has a happy ending. You can hurt yourself |
| Consignment is Just Another Program/Project | | | | with consignment. Consignment is a serious program |
| Because consignment is a total organizational | | | | that requires serious investment of assets and |
| philosophy on both the customer's part and the | | | | resources. Make sure you do your homework in the |
| supplier's part, implementation extends beyond the | | | | beginning. Consignment is not right for every account. It |
| purchasing department. Consignment requires | | | | should be the exception, not the rule. But, if it's done |
| organization, education and training, especially with front | | | | right, it can be the "Knight in Shining Armor." So, if |
| line supervision and labor on the shop floor.3: | | | | you've done your homework and all the pieces fall into |
| Consignment is Easy and Can be Implemented Quickly | | | | place, go for it. And, when that purchasing agent says |
| Consignment is not easy although consignment | | | | to you that he's happy with his current suppliers, don't |
| customers may think so. However, you can make it | | | | be afraid to look him in the eye and, without cracking a |
| easy because of your years of experience, expertise | | | | smile, reply very slowly..."Maybe that's because you |
| and support from your IT department. Consignment | | | | have set your expectations way - too - low!"Dr. Eric |
| requires organizational change and, in some cases, | | | | "Rick" Johnson () is the founder of CEO Strategist |
| physical plant changes. Cultural transition barriers can | | | | LLC. an experienced based firm specializing in |
| extend the process. Sustaining the continuous | | | | leadership. CEO Strategist LLC. works in an advisory |
| improvement philosophy of consignment is critically | | | | capacity with company executives in board |
| dependent on organizational transition.Implementation of | | | | representation, executive coaching, team coaching and |
| consignment requires a plan, an implementation team, a | | | | education and training to make the changes necessary |
| commitment from both parties and staying power to | | | | to create or maintain competitive advantage. You can |
| build a partnership seeking continuous cost | | | | contact them by calling 352-750-0868, or visit for more |
| savings.How do you know if consignment is right for a | | | | information.Rick received an MBA from Keller |
| particular account?First, determine which accounts | | | | Graduate School in Chicago, Illinois and a Bachelor's |
| may or may not be eligible for consignment. At a | | | | degree in Operations Management from Capital |
| minimum, you should consider the following:- Financial | | | | University, Columbus Ohio. Rick recently completed his |
| stability. Since consignment involves the physical | | | | dissertation on Strategic Leadership and received his |
| transfer of inventory to your customer's location | | | | Ph.D. He's also a published book author with four titles |
| before he has paid, you should be sure that he will | | | | to his credit: "The Toolkit for Improved Business |
| remain solvent throughout the program. Financial | | | | Performance in Wholesale Distribution," the NWFA & |
| reports are the preferred method of validating stability.- | | | | NAFCD "Roadmap", Lone Wolf-Lead Wolf-The |
| Minimum level of revenue desired. This needs to be | | | | Evolution of Sales" and a fiction novel, "Shattered |
| determined to justify the investment not only of | | | | Innocence. |
| inventory, but of other resources to manage the | | | | |